February 2017 Newsletter
 

 

 

 

What's Inside?

 

 

 

 

 

 

 

Q & A with Adam Andrzejewski, CEO of OpenTheBooks.com 

 


Could you briefly summarize the mission of your national nonprofit, OpenTheBooks.com, and why Oregon has been a focus of your research?


Our tagline slogan is "Every Dime. Online. In Real Time." Our goal is to capture every dime taxed and spent at every level of government: federal, state and local across America.


Through our public charity at American Transparency (OpenTheBooks.com), we've created the world's largest private database of government spending with 3 billion government expenditures online. Our honorary chairman is former U.S. Senator Dr. Tom Coburn. We're conducting what you could call a spending genome project to map all public spending. Our efforts make low-level Open Records requests obsolete in the digital age. We're giving all sides -- left, center and right -- the tools to squeeze out waste, fraud, corruption and duplication. We not only open the books, we audit them. We've captured nearly all disclosed federal spending since 2000; 48 state checkbooks; and large portions of salaries, pensions and vendor spending in roughly 50,000 of 90,000 municipalities.


In June 2016, we filed an Open Records request with more than 1,500 government bodies in Oregon asking them to produce their expenditures, public employee salaries, and pension information. We have successfully captured $80 of every $100 taxed and spent across the state. We are very excited about the prospects in Oregon to enforce open records law and initiate a new era of citizen led government reform. Just as we've highlighted spending in California, New York, Florida, Illinois, Missouri, Massachusetts, and other states, we are seeing robust reform possibilities in Oregon.

 


You're back in Oregon news this month with a column in Forbes.com: "Oregon Gov. Kate Brown and AG Ellen Rosenblum Blaze the Oregon Trail of Political Patronage." You write that 207 different state contractors funded the political careers of Gov. Kate Brown and Attorney General Ellen Rosenblum, who reaped $805,876 in campaign cash since 2012, while these businesses hold lifetime contracts worth at least $2.6 billion. Why should the public care about these seeming conflicts of interests?


Citizens understand that you "follow the money." The money trail tells you a lot. In Oregon, there is a lot of money at stake and the patterns are very troubling. These donations were morally wrong. There is no legitimate public purpose for the solicitation of $800,000 in campaign cash from state contractors.


Was the governor serving the public interest or her private, political interests? Every single instance where the 207 state contractors made a political donation and had their contract initiated, renewed, modified or extended is a potential conflict of interest. All of it warrants investigation. Here is just one example:


The CEO of Marquis Companies gave a $5,000 donation to Brown in the closing days of her general election campaign. Brown was far ahead in the polls, did not need the money, and did not even file the donation until after the election. Why make a donation that wasn't going to affect the outcome? The donation suggests the intent was to curry favor. Over the next two years, hundreds of millions of dollars in existing state/Marquis contracts are up for renewal, extension or amendment. The most amazing part of this unfolding story is that progressives across America are railing against corporate money and influence in politics. However, Brown and Rosenblum decided to ramp-up their own state contractor-political money machine. It's blatant hypocrisy. This has to make many Bernie Sanders supporters in Oregon livid.

 


In your column you write, "Since 1940, at the federal level, individuals and entities negotiating or working under federal contracts are prohibited from giving political cash to candidates, parties or committees. In Oregon, however, this political patronage is perfectly legal, at least for now." To ask an obvious question, why is this practice illegal on the federal level? And, more importantly, why do you think Oregon allows such lax ethical standards for its government officials?


"Pay to Play" laws are very inconvenient for politicians. Without any limitations on fundraising, their incumbent political power is easily monetized.


Right now, in Oregon, a large pot of taxpayer money is recycled from state contractors back into campaign coffers. The system functions as a "legalized money laundering scheme." At arms-length, all of the transactions are legal. But, quite obviously, the system has been gamed by politicians for their own gain.


We have asked Kate Brown and Ellen Rosenblum to either publicly defend or refund the campaign contributions from state vendors. Currently, cash on hand amounts to $1.2 million between their two campaign committees. Therefore, they have the ability to refund the donations. The public should demand it.


At the federal level, since the 1940s, public outcry forced Congress to enact reasonable restrictions regarding contractors or their executives. Also, the Securities and Exchange Commission has a zero tolerance for financial firms doing business with government.
Over the past couple of years, political parties tried to undermine existing federal law. For example, federal law prohibited then-sitting Texas Governor Rick Perry and New Jersey Governor Chris Christie from raising Wall Street money during their presidential campaigns. Both governors used Wall Street financial firms to invest state pension money. Their allies filed lawsuits. However, the courts upheld the campaign finance law as a permissible and narrow restriction of speech.

 


In your research into government ethical standards, how many states mirror the federal regulations/prohibitions of not allowing state contractors to give political kickbacks/contributions to office holders, and how many states practice the more laissez-faire Oregon approach? On a state level, is Oregon the most egregious offender in allowing such contributions, keeping in mind that the vast majority of states limit individual political contributions while Oregon does not?


According to a comprehensive memo by Public Citizen in 2012, 15 states have an outright ban, with Illinois, New Jersey and Connecticut having the strongest laws. Many other states require special disclosure of state contractor political contributions.


Furthermore, two dozen local jurisdictions including New York City, Broward County, Florida, and Los Angeles, California, have pay-to-play laws. Enforcing pay-to-play prohibitions is one area of the law where the people are far ahead of the politicians. Polling in other states suggests that it is probably a 90-percent issue.

 


What has been the response to your article in Forbes from Oregon officials and from the contractors who benefit from these cozy relationships? How has the Oregon media and public reacted to these revelations?


The Oregonian and Portland Tribune reported our findings early on. Our piece in Forbes trended number three 'Most Popular' in the Opinion section. National radio programs like Hugh Hewitt, twice a CNN presidential debate moderator in 2016, dedicated ten minutes to our interview. Local radio programs across Oregon carried the story on their newscasts.


The Daily Caller news platform in Washington, D.C., wrote two follow-up pieces that trended on Facebook with a combined nearly 20,000 shares.


On the other hand, getting on-the-record responses from the governor, attorney general, connected law firms or other state contractors is very difficult. There is an obvious, concerted strategy to ignore us. However, transparency is a very powerful tool, and we plan to prove its veracity.


We asked Governor Kate Brown and Attorney General Ellen Rosenblum for on-the-record arguments and justification for solicitation of state contractors/campaign donations. Brown's team never responded. The attorney general spokesperson responded, but didn't answer the questions and then took a week's vacation.


The governor, attorney general and contractors are acting as if they have a lot to hide.

 


On the day your column appeared, State Rep. Knute Buehler (R-Bend), a potential opponent to Gov. Brown in 2018, told the Oregon media that he plans to introduce legislation that would restrict "pay-to-play" politics or the practice of state contractors donating money to officeholders. Were you surprised that your column would have such an immediate effect on the current state legislature?


We weren't surprised. People want to solve the problem. From news reports, Rep. Knute Buehler was working on his constitutional amendment since 2015. This is a case where good politics and public policy converge. If a properly drafted amendment gets on the ballot, we would expect passage by a large majority of voters. Over the years, we have seen how our exposure of malfeasance leads to reform. Last summer, our OpenTheBooks.com investigation of Veterans Affairs found $20 million spent on high-end artwork during a period where up to 1,000 sick veterans died while wait-listed to see a doctor.


After our segment aired on Good Morning America and ABC World News Tonight, U.S. Senate Judiciary Chairman Charles Grassley wrote an oversight letter to VA Secretary Robert McDonald. The VA apologized and instituted rules to stop future abuse. The process took about 35 days, which was like light speed at the bureaucratic VA.


Across the nation, and across the political spectrum, there is a pent-up demand for transparency and true public service. Regular people believe in the West Point honor code: "A cadet will not lie, cheat, or steal, nor tolerate those who do." Banning perceived pay-to-play helps create the proper environment for clean, honest government.

 


Oregon House Speaker Tina Kotek, D-Portland, in response to Buehler's legislation, told The Oregonian's Gordon Friedman last week that Buehler's bill may limit free speech, and that "I do think we want to make sure that we are not inhibiting political expression." If prohibiting federal contractors from giving political contributions to federal officeholders has been the law since 1940 and not been seen as a violation of the First Amendment, then why would prohibiting this practice in Oregon be a violation of an individual's speech rights? In your opinion, are the Speaker's comments just a brazen and irrational political response from a party leader used to governing in a one-party state? Do you think in the face of data-based research like yours, the public will eventually demand better?


Obviously, House Speaker Tina Kotek loves running Oregon's "favor factory." At any given point, there are approximately $10 billion in active state contracts. For the governor, attorney general, house speaker, and others, the temptations to play favorites are just too strong. Oregon needs to divorce campaign contributions from the act of conferring, extending and amending state contracts.


Is a ban on government contractors making campaign donations an unconstitutional restriction of speech? No.


In 2015, U.S. Court of Appeals Chief Judge Merrick Garland in the District of Columbia wrote for the majority opinion: " ... because the concerns that spurred the original bar remain as important today as when the statute was enacted ... the statute is closely drawn to avoid unnecessary abridgment of associational freedoms."


Oregon's political class is facing a problem that exists for career politicians across the country: the country is fed up with business-as-usual. The people instinctively know that something is very wrong. Both Bernie Sanders and Donald J. Trump tapped into this sentiment.


Speaker Kotek is in a very difficult political position. Like the governor and attorney general, her choice is clear -- embrace reform or try to preserve a corrupted system at a high cost to personal reputations and political careers.

 


Last month OpentheBooks.com, in response to President's Trump threat to withhold money from those jurisdictions that won't change their policies on illegal immigrants, discovered that more than 100 American sanctuary cities receive $27 billion in federal funds. What has been the response to your study from these local jurisdictions? Have any changed their policies since?


We have not heard of any cities reversing their status. Of course, we published our study only a couple of weeks ago. Our study helps inform the national debate. We tried to answer the question: What's at stake? On January 25, 2017, President Donald J. Trump issued Executive Order: Enhancing Public Safety in the Interior of the United States. The order denies federal funding to sanctuary cities that choose not to comply with federal laws regarding deportation of illegal entrants.


Reaction to the new policy from across the political spectrum was immediate. However, the politicians, pundits and journalists admitted then that the total amount of federal funding was undetermined.


Our report -- Federal Funding of America's Sanctuary Cites -- quantified federal funding (FY2016) to the agencies and entities of America's 106 Sanctuary Cities. Conclusion: We sourced nearly $27 billion to Sanctuary Cities in federal grants and direct payments. Our report was carried by the national NBC online news platform, The Day's Top National & International News: What's A Sanctuary City? Texas Governor Greg Abbott tweeted out our findings. Our editorial in Forbes, Mapping $27 Billion in Federal Funding of America's Sanctuary Cities, trended to number four 'Most Read' in the Opinion section.


In Portland, we quantified $173.9 million in federal payments to government agencies and entities within the city. The federal grants and direct payments average only $274 per capita. The overall average of federal funding per capita was $454 across the 106 cities.


Our goal is to enhance the national policy debate and let the facts speak for themselves. A fully informed citizenry can only help form better public policy solutions.

 

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Arts Tax: the Longest Running Joke
By Eric Fruits, Ph.D.


On March 6, the Oregon Supreme Court will hear oral arguments to determine the constitutionality of Portland's Arts Tax. The hearing will be the set up for the punch line to what may be the longest joke in Oregon history.


If you live in Portland, the Arts Tax is both a joke and a punch line. It's a joke because every breathing adult in Portland is supposed to send in an Arts Tax form to the city. But, the city doesn't know who every breathing adult is. Even if you are exempt, you are supposed to send in a form proving you're exempt.


It's a joke because more than a third of the people who are supposed to pay don't pay -- even a Portland school board member. The city's website crashed on the first Arts Tax deadline. Then, on top of that, it was revealed that the credit card software to accept Arts Tax payments wasn't up to modern security standards.


Around Portland, if you want to shoot down a bad idea, just add the punch line, "That sounds like the Arts Tax." When City Hall was searching for new taxes to fund roads, council members had to repeat over and over, "This won't be like the Arts Tax."


How did a tax that passed by a near 2-to-1 margin turn into a constitutional challenge?


Portland voters passed the Arts Tax in 2012 by a large margin. The tax is $35 per person for anyone 18 or older who earns income from almost any source (PERS income is exempt). Individuals below the poverty line or with income less than $1,000 are exempt from the per person tax.


A flat tax per person is also known as a head tax or a poll tax. The Arts Tax is a flat $35 per person, whether they make a penny over $1,000 or they make a million dollars. Commissioner Steve Novick declared the Arts Tax is "beyond regressive."


Oregonians hate head taxes. They hate them so much they banned them twice. First in 1907, the legislature banned head taxes. Then, in 1910, the voters put the ban in Oregon's Constitution, which clearly states: "No poll or head tax shall be levied or collected in Oregon."


That should be it: No Arts Tax. End of story. But, it's not.


The city argues that because there is an income threshold, the unconstitutional per person Arts Tax has magically transformed into a constitutional income tax.


In my amicus brief to the Oregon Supreme Court, I note that head taxes are about as old as civilization itself. Before the days of W-2s and 1099s, if you had a head, you paid the tax. But even Ancient Rome made exceptions for poverty. England, in the 1300s, instituted its first poll taxes that specifically excluded the poor. In colonial New England, poll taxes varied with income and poverty. Nothing in the long history of poll or head taxes suggests that financial exemptions were unusual, or that including such exemptions legally transforms the poll tax into something else.


First, the Arts Tax is in fact imposed upon all Portland residents over age 18. All persons over that age must file something. With the Arts Tax, every resident of Portland is required to file either a tax return or a "request" for exemption. In other words, no person is categorically exempt, an exemption must be proven.


Second, the tax is a set fee, regardless of income level, and it must be paid so long as one resides above the poverty limit or cannot prove that they fall below it. The relatively low rate of $35 per person per year is irrelevant. The rate is fixed for all those who must pay. This is the textbook definition of a head tax -- an unconstitutional head tax in the State of Oregon.


On March 6, the Oregon Supreme Court will be hearing these arguments. It's unlikely their decision will be made before the next batch of Arts Tax bills go out in April. Until then, Oregon's longest joke will be waiting for the punch line.

 

The Arts Tax case, George Wittemyer v. City of Portland, will be heard on March 6 at Lewis and Clark Law School at 9 a.m. The public may attend.

 

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An Alternative Path to Public Pension Reform or Is There a Case for Fraud and/or Malfeasance?

 

Every two years during the biannual state budget process, PERS inevitably becomes the topic of discussion. The debate generally centers on how we are going to fund or reduce our PERS obligations.


The funding side usually falls into two categories: increase taxes or cut funding to other parts of the budget to free up money to pay for PERS.


On the other side of the coin, reducing PERS obligations almost always takes the form of finding loopholes and testing them in court.


There is a third path to correcting the PERS issue, which has plagued our state budget and public coffers for decades.


Overturn the contracts completely on the basis of fraud and malfeasance.


You have heard it before, but it is always in the context of Republicans or Conservatives screaming about the sweet deals public employees are getting. But they have never offered up a legal case.


Here is the possible path.


Governments operate under a different set of accounting regulations than public and private companies. The organization that sets the standards for governments is called the Government Accounting Standards Board (GASB).


In certain areas of regulation, GASB has lagged behind the private and public company accounting standards set by the Financial Accounting Standards Board (FASB). This is particularly true when it comes to pension and other post-employment benefit reporting.


The actual accounting regulations are much too nuanced to discuss in detail, but the key takeaway is that governments have been underreporting the liabilities and expenses associated with pensions and other retirement benefits for decades.


In particular, many liabilities have been buried in the notes of the financial statements or, even worse, not reported at all. Anyone remember TriMet's $1 billion unfunded liability for post-retirement health care? You won't find it on their balance sheet.


In addition, until recently governments were allowed to use discount rates disconnected from reality. Since 1998, Oregon's pension system used an 8 percent discount rate (recently changed to 7.5 percent), even though the actual return of the pension funds was 5.5 percent in the past decade.


This seemingly innocuous change has a large impact. In conjunction with a change in mortality rates used for calculating the liabilities, a change from 7.75 percent to 7.5 percent resulted in an increase in unfunded liabilities by $3.6 billion.


The opacity of pension costs and liabilities creates a disconnect between promised benefits and affordability.


But how might this constitute fraud? Accounting standards may obscure the true costs of public employees from the taxpayers, but where is the intentional misrepresentation? After all ignorance doesn't constitute fraud.


Beyond the obvious fact that governments and public union representatives knew additional liabilities existed beyond what was being reported, they actually lobbied to keep it that way.


In a study conducted by Harvard Business School, "Lobbying Behavior of Government Entities: Evidence from Public Pension Accounting Rules," they found that states with large unfunded liabilities lobby against the new rules that would further reveal the extent of their pension crisis.


"Consistent with opportunistic motivations, we find that states' opposition to the liability increasing provisions embedded in these standards is increasing in the severity of pension plan underfunding, state budget deficits, and the use of high discount rates. Further we find opposing states are subject to more stringent balanced budget requirements and greater political pressure from unions. By contrast, we find evidence that the support from financial statement users for these provisions is amplified in states with poorly funded plans and large budget deficits, suggesting government lobbying is misaligned with a public interest perspective."

 

This is intentional misrepresentation. They have known for decades that increased transparency and modern accounting standards will put additional pressure on them politically to ratchet benefits back to public employees ... and they lobbied to stop it.


While there is no direct precedent (that this non-attorney author) is aware of for such a case, there are a couple of recent indirect cases in which investors have sued governments for misrepresenting their financial statements in order to sell municipal bonds.


It seems reasonable, given our continued and growing budget crises, that taxpayers, union members and other parties might have a case to reset PERS and replace it with a fair and sustainable system so we don't have to pull our collective hair out every two years.

 

Sources:

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Bordering on Cleverness
By Philip J. Romero

 

After several presidential terms of complete indifference about reforming America's unfair, anti-growth and uncompetitive tax system, the GOP sweep in November finally offers a chance to repair this self-inflicted wound. The GOP Congressional leadership under Speaker Paul Ryan produced a plan in the summer of 2016, currently being refined by Ways and Means chair Kevin Brady. President Trump offered his own plan during the campaign and has made supportive noises about what is emerging from the capitol. He has been hyperactive in shaming American companies to keep jobs onshore.


The probable ultimate legislation will flatten the tax structure, reducing the average tax rate (particularly our very high corporate rate) and lowering the number of brackets from seven to three or four. It will encourage investment by permitting corporations to deduct its full costs when incurred, rather than spread it out over many years. It will eliminate the vast majority of deductions in favor of base-broadening. It will eliminate estate taxes entirely. It is unquestionably the most dramatic reform plan since the 1986 Tax Reform Act -- less extensive in its bracket-flattening, but more so in its loophole-closing.


Critics on the left and center will argue that the plan is skewed toward the rich, which is factually accurate, but unavoidable. The Tax Foundation reports that although the median taxpayer will enjoy a 9 percent tax cut under the House GOP plan, the top 1 percent will see a 13 percent reduction. Our progressive tax structure (in which high income taxpayers pay a higher percentage of their income in taxes) virtually guarantees that across-the-board cuts will disproportionately favor those who pay the most in taxes, since they paid the most before. Upper income filers will pay an even larger share of total income tax revenues under the plan than the status quo.


Critics from the right have a stronger case. The House plan will add $2.4 trillion to the deficit over ten years under conservative (static) assumptions. Proponents will argue that the extra economic growth that reform will catalyze will expand incomes and bring a deluge of added tax revenue. But a reasonable dynamic analysis by the Tax Foundation shows the deficit will still modestly expand under the plan. And this is before the multi-trillion dollar infrastructure and defense modernization programs the president has also advocated.


How to pay for all this -- or at least for enough of it to preserve the GOP's tattered claim to be fiscal hawks? Enter another congressional variation of a Trump idea: a "border adjustment tax" (BAT). Trump himself has said that he "isn't crazy" about the BAT idea, although his campaign statements seemed to strongly support its objectives.


The BAT is intended to encourage exports and discourage imports. Export income would be exempt from tax, while the cost of imports would no longer be tax-deductible. The BAT is expected to provide $1.1 trillion in added tax revenue over its first ten years (reflected in the figures above) under the admittedly very imprecise estimates due to its complex effects on international trade.


At its core, the politics of taxation is about shifting the tax burden off of my constituents and onto others. That is why cities and counties tax hotels and rental cars (used by nonresidents), why Democrats favor high tax rates on upper income filers, and why nationalists favor taxing foreigners (imports). The BAT is a two-corner shot: It covers about one third of the deficit created by tax reform with a tax that arguably is exported to our trading partners.


It also cleaves the GOP's core business coalition. Companies that run big trade surpluses, such as Boeing or Microsoft, love the prospect that their sales won't be taxable. But companies that have built their supply chains from global imports -- like every major retailer -- feel otherwise. The BAT will be paid by their American customers, which will lead to either price increases or lost sales depending on the competitiveness in their market segment.


The international implications are difficult to predict. Plan authors argue that economists believe that a narrowed trade deficit from the plan will boost the dollar, making imports cheaper in dollars, and mitigating the inflationary impact. They are correct about the economic theory, but any worldly observer will acknowledge that few markets are as unpredictable as currencies.


Finally, it is naive in the extreme to expect that our trading partners will passively accept a huge degradation in their terms of trade. Plan advocates argue that many countries' value-added taxes (VATs) have similar effects to the BAT, so fairness will mandate that other countries accept our BAT. Never mind that the U.S. has exploited its "exorbitant privilege" of paying for trillions in imports every year with its own decreasingly hard currency. The world's money supply is really managed by the Federal Reserve (poorly, as several past columns have argued), and the dollar surplus has been baked into world finance, trade and logistical arrangements for 50 years. Upending this apple cart will have impacts that even economists lack the arrogance to predict confidently. The tragic history of the 1930s demonstrates that trade wars, like arms races, have only losers.


The BAT is brilliant domestic politics: delivering on a core campaign promise, shoring up Congress's right flank from fiscal scolds, and economically rewarding manufacturing (Red) states while punishing consuming (Blue) states. Arguably, it can help balance the scales of globalization, since a handful of states and sectors have paid in unemployment for the lower prices and greater choices all of us have enjoyed. Globalization has shaped the American political map (drawing well-educated and prosperous liberals to the coasts and relegating conservatives to the interior), so a new trade regime can beget a new political alignment.


Using the tax code as a tool of economic engineering is hardly a BAT invention -- it is central to Republican belief. But being clever isn't the same as being wise.

 

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Oregon Transformation Newsletter is a project of
Third Century Solutions
Principals: Bridget Barton and Jim Pasero
Send comments to: Jim@ThirdCenturySolutions.com